Pro Perspectives 2/22/22

February 22, 2022

It's been three months now since satellite images showed a Russian troop build-up on the Ukraine border.
 
Today, after a LOT of posturing, a line has apparently been crossed and "costs" have been imposed on Russia, from the West.  These costs include an asset freeze on three Russian banks, and sanctions on all members of Russian parliament.
 
Keep in mind, Biden lobbed warnings of sanctions as early as December 7th.  It's safe to say, there has been plenty of time to move money.
 
With that in mind, consider this chart below …

This chart explains the wild swings we're seeing in stocks (and markets, broadly).  Liquidity has dried up.
 
The end of crisis-level monetary and fiscal stimulus (i.e. the closing of the global liquidity spigot), should (and has) triggered the exit and repatriation of some foreign capital from U.S. capital markets (namely stocks and Treasuries).  In fact, December was the biggest outflow of foreign money (from the U.S. capital and financial account) since September of 2020. 
 
Add to this, at precisely the same time (over the past three months), this geopolitical event has bubbled up.  And with sanctions telegraphed, and World War 3 prognostications loosely thrown around, it's an environment for foreign capital to be on the move (not just Russian).
 
This all results in lower market liquidity.  
 
So, after two years of a liquidity deluge, we're now seeing the effects of illiquidity on markets.  Translation: The swings become exaggerated.   

Pro Perspectives 2/18/22

February 18, 2022

As we end the week, the chatter continues about Russia/Ukraine. 
 
Today, the White House Deputy National Security Advisor talked about our preparedness to respond, if Russia were to retaliate against sanctions, with cyber attacks on U.S. companies and/or infrastructure.
 
Of all of the things we should consider as possible in 2022 (after the chaos of '20 and '21), it's further destabilization of economies (and life) through cyber attacks.  
 
If for no other reason, should we consider this possible/likely, than it was gamed out by the World Economic Forum last year, here (as was the pandemic, back in October of 2019, here). 
 
This group (WEF), with constituents that include leaders of virtually every major government and company around the world, is the force behind the global climate agenda, and much of the economic and social agenda.  As we know, global governments have embraced these agendas, and are executing in "global cooperation."   
 
What else will require "global cooperation" to combat, in the words of the WEF leadership?  A cyber pandemic.  This is a cyber attack, as they describe it, with covid-like characteristics.
 
For the sake of being informed, it's probably not a bad idea to take a few minutes and familiarize yourself with the way they view the world and the cyber threat (in this video).  Not a bad idea to be prepared.  

Pro Perspectives 2/17/22

February 17, 2022

Last Friday, a wave of risk aversion hit markets after the White House postured over a potential Russian invasion of Ukraine.
 
The outlook since, for such an event, has been unclear and confusing at best. 
 
Let's take a look at the behavior of markets for any signals on whether or not a serious conflict may be imminent.  
 
What happened last Friday, following the White House warnings?  There was aggressive buying in the safe-haven assets. Treasury prices jumped (price higher, yields lower).  Gold jumped.  And oil prices jumped, on the potential for a supply shock. 
 
What happened today?  For a second time in less than a week, money moved out of "risk assets," like stocks, and into Treasuries.  And gold traded to the highest levels since June of last year (over $1900, and marching toward record highs). 
 
But oil was down.  That doesn't square with an increased chance of a war (especially involving the third largest oil producer in the world). 
 
With that in mind, remember from my note last Friday, Bitcoin moved lower on the "risk aversion" trade.  It did so today, too. 
 
This is an asset thought by many to be the "new gold," and therefore the new store of value/ safe-haven asset.  It hasn't performed as such, even in as extreme a case as a prospective World War.  Confusing. 
 
So, with the behavior of oil and bitcoin in mind, we have to consider that this recent market activity may have more to do with Fed policy (i.e. the coming tightening cycle). 
 
Supporting that consideration:  The inflated "companies of the future" are continuing to deflate — the manifestation of which is Cathie Wood's ARK Funds (now down 57%).  And as we discussed in my January notes, the "money of the future" (i.e. bitcoin) appears to be highly correlated.  

Pro Perspectives 2/16/22

February 16, 2022

China's inflation data overnight came in softer than expected.  But the producer price change from last year is still running at over 9%.
 
Meanwhile, curiously, the consumer prices in China are reported to have risen less than 1%. 
 
How is that possible? 
 
Price controls.

As an example, the Chinese government intervened in the domestic iron ore market last summer.  Iron prices had more than doubled from pre-covid levels.  The government stepped in, with "investigations" and "inspections" into producers and speculators.  The price of domestically produced iron ore (in China) did this … 

The Chinese government intervened in the domestic coal market in late October.  Coal prices had tripled over the prior twelve-months.  Coal prices did this …
You may recall, we talked about all of this late last year, and asked the question:  Would Biden follow the Chinese playbook to respond to hot U.S. inflation (i.e. go the route of price controls)?  
 
He's already alleged price gouging from the domestic oil and gas industry and (similarly) called for an "investigation" into U.S. producers (for the audacity of making wider profit margins on higher prices, which is now controlled by OPEC).
 
Yesterday, Biden said he would be "coordinating" with major energy consumers and producers, and will be "prepared to deploy all the tools and authority at his disposal to provide relief at the gas pump."
 
These "tools" may come in the form of some sort of subsidy, at some point, but a subsidy would sustain the demand dynamic for oil.  Apply that to a world that is undersupplied and underinvested in new supply, and the price of oil will continue to rise.   

Pro Perspectives 2/15/22

February 15, 2022

Producer prices for January were almost 10% higher than the year prior.  This follows the report last week of a year-over-year rise in consumer prices of 7.5%.
 
Tonight we'll hear from China on producer prices.  This number will represent the prices, in large part, we should expect to be paying for products in the months ahead.
 
Spoiler alert:  These prices have been hovering around the highest levels in 26-years, and will likely continue running hot (at a double digit yoy rate), thanks to the broad strength in global commodities prices (i.e. input prices).  
 
Here's a look at the chart …

If this number comes in hot, those that have been calling the peak in inflation will have to recalibrate — that includes some Fed officials.
 
On that note, as you can see in the chart below, the spread between market interest rates (market determined) and the Fed Funds rate (set by the Fed) continues to widen aggressively.    
 
This chart reflects a Fed that's not only way behind, but at risk of losing control of the interest rate market.  In that case, these market determined rates could soar, which could slam the brakes on the economy (not a good scenario). 
 
The Fed has some work to do.
 
Not helping matters, Jay Powell has yet to be confirmed by Congress for his a second term (which officially ended earlier this month).  Until then, he's considered a temporary Fed Chair.  This is not projecting stability, for an interest rate market that is already on shaky footing.   

Pro Perspectives 2/14/22

February 14, 2022

Oil traded above $95 today, for first time since 2014.
 
Let's take a look at the chart …

What's similar and what's different about the current environment and 2014?  
 
First, throughout 2014, Russia was bullying it's way into Ukraine.  It ended with the annexation of Crimea. 
 
This time, Russia wants all of Ukraine. 
 
As you can see in the chart, oil prices rose from about $90 to a high of $108 when this conflict was unraveling back in early 2014. 
 
What happened in late 2014?  
 
In late 2014, Russia began withdrawing troops from Ukraine, and signed an EU brokered deal to begin supplying gas again to Ukraine (which flows to the EU). 
 
Oil prices began to fall.  Then, on the evening of Thanksgiving (2014), at a scheduled meeting, OPEC surprised the oil market with a well-timed announcement that they would not defend the price of oil with a production cut.

Oil prices fell about 14% over the next 24 hours (in a thin, holiday market) — and was nearly halved just two months later. 
 
What was the motivation?  They wanted to put the emerging, competitive U.S. shale industry out of business, by forcing prices below the point at which the shale companies could profitably produce.   

They nearly succeeded.  Shale companies started dropping like flies, with more than 100 bankruptcies over the next two years. 

 
What's different now?  Both domestic and global oil policy has done the job for OPEC, destroying competition (including U.S. shale).  OPEC is now back in the driver's seat, in full control of the global oil market.  They want higher prices (much higher).  
 
With that, today, with oil at $95, the Secretary General of OPEC rebuffed any ideas that OPEC might consider increasing production to stabilize oil prices.  As he should, he blamed an undersupplied market, due to the lack of global investment in new production. 
 
He said OPEC members were having challenges just meeting the current production targets (much less an increased target).  This is OPEC using the cover of the destructive global climate agenda, and the related investment withdrawal and regulatory noose placed on oil production.
 
So, OPEC now has every incentive to drive prices higher (not lower, like in 2014).
 
Add to this, unlike 2014, the Ukraine situation (as it appears) will pull the world into war, against the third largest producer of oil, in an oil undersupplied world. 
 
Prices are going higher, much higher. 

Pro Perspectives 2/11/22

February 11, 2022

Risk aversion hit markets this afternoon on the White House comments about the potential for a Russian invasion of Ukraine.
 
Without speculating on the likelihood, let's just take a look at the information to be gleaned from the market response.  
 
First, the 10-year yield completely (and quickly) reversed the move from yesterday.  So, a day after a 7.5% inflation number, and chatter of 100 basis points of rate hikes by July, global capital plowed IN to U.S. Treasuries.  This signals a "flight to safety," even in the face of likely depreciation in the value of Treasuries, given the rate outlook.
 
Another signal of flight to safety:  Gold.  Gold screamed higher on the White House/Ukraine news.  
 
What didn't perform like a safe-haven asset?  Bitcoin.  Gold went up almost 2%.  Bitcoin went down more than 2%.   
 
For something thought to be supplanting gold, it didn't perform as such (at least today). 
 
With the jawboning of war, what happened to oil prices?  Oil was up 4.5% today.  Given the global agenda to destroy fossil fuels, the underinvestment in oil exploration has led to an undersupply-meeting-pent-up-demand dynamic, which already has oil prices on path for triple-digits.  Now, add in the possible effects of "wartime," and against a country that is the third largest oil producer in the world. 
 

Pro Perspectives 2/10/22

February 10, 2022

The inflation data for January came in hot, again.  Remember, in consideration of the “inflation is petering out” scenario (believed by some), we took a look at Chinese PPI and broad commodities prices on Monday. 
 
This is the equivalent of “skating to where the puck is going.”  The price of the products we will be buying in the months ahead, will be determined (in large part) by the inputs into Chinese production (prices of which remain near 26-year highs). 
 
Commodities are the key input, and those prices, after a small dip following the Omicron new in late November, have been racing higher (as you can see in this chart below).  Add to this, the bull cycle in commodities in still in the very early stages.  

With the above in mind, the Fed is now 750 basis points behind the curve (with rates at zero and inflation at 7.5%). 
 
Not too surprisingly, comments from a Fed voting member hit the wires this afternoon suggesting the Fed could hike by as much as 100 basis points by July.  This is the Fed’s way of setting market expectations, which can be a form of (in this case) tightening (i.e. the Fed’s “forward guidance” tool).
 
A Fed that is posturing more aggressively, should be good for markets.  Remember, unlike the “taper tantrum” of 2013, the policy error this time isn’t removing emergency policies prematurely.  It’s a Fed that has been/is too late. 
 
In this case, the more, and the earlier, the better. 
 
The less, and the later, the more dangerous.   

Pro Perspectives 2/9/22

February 9, 2022

Stocks continue to make a strong comeback.  
 
Let’s take a look at the technicals in the S&P 500.  After all, I called this January decline a “technical” correction.  So, how do things look now?

As you can see in the chart above, we had a 12% correction in the S&P 500.  We've since regained the 200-day moving average (the purple line).  And today, we may have broken-out of the down trend. 
 
This, as we are getting some fundamental fuel for stocks.  Covid restrictions are easing in the more rigid states and areas of the world, signaling perhaps the release of more pent up demand.
 
Meanwhile, U.S. corporate earnings continue to defy the belief (of some) that Q4 would be a hiccup in the earnings streak.  Positive surprises on earnings and revenues, are driving a better than expected earnings growth rate for the S&P 500 (with more than half of the constituents now reported for Q4). 
 
We're on path to see nearly 30% earnings growth (yoy).  That would be four straight quarters of earnings growth above 25%. 
 
Meanwhile, stock prices have come down to begin the year, which has reset the valuation on the broad market (lower "P", higher "E"), to a forward P/E of around 20.  While that's above the long-term market average (about 16), it's not too expensive.  Historically, when rates are low, the multiple on stocks tends to run north of 20.  Even with the projected rate path, rates will be low for quite some time. 
 
Importantly, within these Q4 earnings reports we are hearing "higher labor costs."  We talked about this coming into earnings season as the expected theme of Q4. 
 
But margins are solid – better than the year ago comparison, and better than the five-year trend.  Why?  Because labor costs and being passed along to consumers through higher prices.  And demand isn't waning.  That's good news.   
 
So we've seen the reset in the price of assets (and stuff).  Now we're seeing the reset in wages (though we should expect it to be uneven).  This is the debt devaluation formula that was intentionally pursued by policymakers from the outset of the pandemic response.  Inflate nominal prices (and therefore GDP) and pay back debt with less valuable dollars.  

Pro Perspectives 2/8/22

February 8, 2022

Let's take a look at Facebook. 
 
This stock closed below pre-pandemic levels today.  It's down 34% in just the past five trading days. 

As we've discussed for quite some time, a rising interest rate environment is bad news for high valuation, high growth stocks.
 
Despite it's size and maturity (being part of the "big tech" oligopoly, and having garnered a trillion-dollar valuation just months ago), Facebook remains a high growth stock. For 2021, the company grew revenues at 37% and operating income by 42% (year-over-year).
 
With that, as Wall Street contemplates factoring in an discount rate (interest rate) in their valuation models, the valuation comes down.  
 
But how far is too far?
 
Consider this:  Facebook was trading north of 25 times earnings before Jay Powell's pivot on the inflation outlook late last summer.  Today, it's 16 times.  That's now in-line with the long-term broader market multiple and its the cheapest valuation on Facebook since becoming a public company (which means, in the history of the company, including its history as a private company).
 
So, today you get a high growth company with a dominant market position, with 40% operating margins — at a long-term average broad market multiple.  It's a buy.